VERSATILE DATAMICTS (P) LTD.,NEW DELHI vs. ACIT, CENTRAL CIRCLE- 15, NEW DELHI

During the course of assessment proceedings, learned Assessing Officer observed that the assessee has raised share capital of Rs.24 lacs from Rhone Sales (P) Ltd. And Rs.15 lacs from Rapi Marketing (P) Ltd. And further observed that the pre-search enquiry revealed that the assessee group had received substantial amount of share capital from various non- descript and shell companies which did not have any factual identity and creditworthiness. It was further found that the investment by such entities with the assessee group was mainly in the form of share capital which was subscribed at an abnormally high premium which lacked genuineness on their part to have agreed to subscribe at such premium without having received any return either in the form of dividends or appreciation in the value of their investment till date. Further the Ld. Assessing Officer observed that search action further established beyond doubt that the assessee company like other group companies had received the impugned share capital from various non-descript and shell entities/companies which grossly lacked creditworthiness and were in the nature of accommodation entries to convert the undisclosed income of 4 to 7532/Del/2017 the assessee group having been received in the form of such share capital from the stated entities/companies. He further observed that search action revealed the modus operandi of the assessee group for converting their undisclosed income through the aid of various personnel/employees who categorically admitted having aided the group in such misdemeanor by facilitating the process of creating various bogus companies within the group and having received share capital from such outside non- descript/shell companies and thereafter making the same available in the operating companies of the group through a layered structure as per the instructions of the promoter and his other employees/office bearers.

In his order, Ld. Assessing Officer examined the tax returns from the income-tax data base and referred to the enquiries conducted on Delhi and Kolkata based companies, the statements of Shri Narender Kumar Jain, who is close confident and associate of the promoter of the MMG Group Shri Sanjeev Agrawal, Shri Ashwani Verma, their CA, the statement of Shri Narinder Kumar Garg who is Director of M/s North Delhi Beverages Pvt. Ltd., the statement of Shri Sanjeev Aggarwal, who is director-cum- promoter of MM group companies, the statement of Shri Krishan Kumar Bajaj, General Manager-Finance of the assessee company. He also examined the statement of various other persons, the enquiries conducted u/s 133(6) of the Act and the summons issued to various directors of the non-descript companies u/s 131 of the Act which were either returned back or delivered but there was no response or only part compliance.

Assessee carried the matter in appeal before the ld. CIT(A). The assessee challenged the Assessment Order on two counts, on law and facts. On the question of law, assessee challenged the assumption of jurisdiction u/s 153A of the Act stating that the original return was filed on 26.9.2013 which was processed u/s 143(1). Time for issuance of notice u/s 143(2) of the notice expired by 30.9.2014, whereas search u/s 132 was conducted in this case on 28.03.2015 and notice u/s 153A was issued on 10.05.2016. It is submitted that no incriminating material was detected as a result of search and the addition was made on the basis of post-search enquiries and statements recorded u/s 132(4) of the Act. Relying on various decisions, it was argued that since no assessment was pending on the date of search and the addition has been made on the basis of post-search enquiries and statements recorded u/s 132(4) on various persons, therefore, the Assessing Officer has no power to assume jurisdiction under the provisions of section 153A of the Act.

Ld. CIT(A), however, having perused the assessment order and case laws cited on behalf of the assessee returned a categorical finding that the assessment proceedings were pending at the time of search and was abated. He further found that the department found information in respect of the share certificates and the counterfoils thereof and other significant related material during the course of search operations that upon collating with the information received by the department lead to specific inputs in respect of doubtful nature on genuineness of the equity infused in the companies of the group, and the material so gathered is prima facie incriminating in its nature and substance so as to attract the provisions of S. 153A of the Act. Having found so, he proceeded to observe

Ld. CIT(A) further observed that with effect from assessment year 2013-14 onwards, the provisions of section 56(2)(viib) are attracted to the case of the assessee. He observed that the share premium charged by the assessee clearly falls within the mischief of this section in absence of assessee furnishing a reliable and robust basis of valuation of such equity shares as per Rule 11UA(1)cb of the Act.

Aggrieved by such an order of the ld. CIT(A), the assessee preferred the appeal stating that in the absence of any incriminating material found as a result of search, initiation of proceeding us/s 153A are bad and the addition of Rs.39 lacs by the learned AO and upholding of the same by the learned CIT(A) are against the law declared by the Hon’ble jurisdictional High Court in the cases of CIT vs Kabul Chawla, 380 ITR 573 and PCIT vs Meeta Gutgutia, 395 ITR 526. Assessee further assailed the findings of the learned CIT(A) that the original assessment in this matter was pending as on the date of issuance of notice u/s 153A of the Act is factually incorrect. It is further stated by the assessee in the grounds of appeal that the authorities below wrongly assumed that the credits by way of share capital represented unexplained cash credit and wrongly shifted the burden to the assessee. According to the assessee, the authorities below 9 to 7532/Del/2017 failed to notice that the shareholders are corporate entities duly assessed to tax and had subscribed to share capital through banking channels and supported by necessary documents as such, in view of the material placed on record by the assessee to prove the genuineness of transactions and creditworthiness of the share creditors is beyond any doubt. Assessee further challenged the findings of the learned CIT(A) in respect of other applications of provisions u/s 56(2)(vii)(b) of the Act to the facts of the case.

He further submitted that the sum offered by Mr. Sanjeev Aggarwal in his statement recorded u/s 132(4) amounting to Rs.88.52 crores comprised of two components i.e. pertaining to assessment year 2008-09 –and balance – Rs.57.74 crores. He submitted that Shri Sanjeev Aggarwal has retracted from his statement regarding surrender of income to the 10 to 7532/Del/2017 extent of Rs.30.78 crores pertaining to assessment year 2008-09 which is evident from pages 30 to 35 of the Paper Book. 14 While placing reliance on the decision of the Delhi Bench of the Tribunal in the case of Brahmaputra Finlease (P) Ltd. vs. DCIT vide ITA No.332/Del/2017 order dated 29.12.2017 for assessment year 2007-08, the decision of the Hon’ble Delhi High Court in the case of CIT vs. Best Infrastructure (India) (P) Ltd. reported in 397 ITR 82 and the decision of the Hon’ble Delhi High Court in the case of CIT vs. Harjeev Aggarwal reported in 290 CTR 263, he submitted that the statements recorded u/s 133(4) do not by themselves constitute incriminating material.

He placed reliance on the decision of the Hon’ble Delhi High Court in the case of CIT vs. Kabul Chawla reported in 380 ITR 573, the decision in the case of Pr.CIT vs. Meeta Gutgutia reported in 395 ITR 526 and various other decisions, for the principle that that in absence of any incriminating material found as a result of search, assumption of jurisdiction u/s 153A is not in accordance with law. For a similar proposition of law, he also relied on the decisions reported in Pr.CIT vs. Lata Jain, 384 ITR 543 (Del); CIT v. Chetan Das Laxhman Das211 Taxman 61 (Del); CIT vs. Anil Kumar Bhatia 352 ITR 493 (Del); CIT vs. Kurele Paper Mills P. Ltd. dated 06.07.2015 380 ITR 571 (Del); CIT vs. MGF Automobiles Ltd 241 Taxman 440 (Del); Pr. CIT vs. Smt. Kusum Gupta ITA No.634/2015; Praveen Kumar Jolly W.P. (C) 8721/2014 & CM No.20052/2014; Pr. CIT vs. Mahesh Kumar IT Appeal No.810/2016; Pr. CIT vs. Ram Avtar Verma IT Appeal Nos.61 & 62/2017; and Pr. CIT vs. Best Infrastructure (India) (P) Ltd397 ITR 82.

It is his further submission that the burden of the assessee was discharged since the investor is a listed group company and copy of audited financial statement, acknowledgement of return of income, confirmations of investor, bank statements, memorandum of article or association were filed. Further, assessment was completed u/s 143(3) of the Act in the case of the said investor company. There is no evidence on record to suggest that the money received as share capital and share premium has originated from the coffers of the assessee company.

Placing reliance on several decisions, Ld. AR argued that non- production of shareholder/director by the assessee cannot be a ground for making addition u/s 68 if assessee discharged the initial onus cast on it. He submitted that the Assessing Officer has not established that the particulars furnished by the assessee are false especially when no 12 to 7532/Del/2017 enquiries were made either from the shareholder by issuing notice u/s 133(6) or enquiry from the Assessing Officer of the Investor Company or banker of investor or registrar of company.

In respect of the allegation leveled by the Assessing Officer that the investor company had low income, is concerned, he submitted that low income of shareholder is not a relevant consideration and only net worth is relevant to determine the creditworthiness of the shareholder. He submitted that since the assessment has been completed u/s 143(3) in the case of the investor company which is a group company and a listed company, therefore, the Assessing Officer, without making proper enquiry could not have made addition on flimsy ground.

Referring to the order of the ld. CIT(A) invoking the provisions of section 56(2)(viib) read with Rule 11UA(1)(cb) is concerned, he submitted that the ld. CIT(A) without giving any opportunity to the assessee held that the share premium charged by the assessee falls within the mischief of the said provisions. He submitted that the ld. CIT(A) cannot sustain an addition on the basis of new source of income which was not there in the assessment order. In any case he submitted that the book value of the shares is much more than the share premium charged by the company. He accordingly submitted that in absence of any incriminating material, no addition could have been made by disturbing a completed assessment. Further, the assessee has discharged the initial burden cast on it by furnishing sufficient details to prove the identity and capacity of the investor company and genuineness of the transaction. Since the investor 13 to 7532/Del/2017 company has been assessed u/s 143(3) and since the investment of the assessee in the investor company has also not been doubted by the Assessing Officer, therefore, under the facts and circumstances of the case no addition is sustainable legally and factually.

Per contra, Ld. DR heavily relied on the order of the ld. CIT(A). She submitted that the A.O. has extensively and exhaustively proved that identities and creditworthiness of such parties & genuineness of transactions regarding amount of Rs.39 lacs as share capital & share application money paid to the Assessee company by several entities/firms/companies are bogus, non-existent paper entities having no worthy business to advance such share capital & share application money. Thus said assessee company has miserably failed to prove all three ingredients required for provision of section 68 of Act.

Placing reliance the decision in the case of CIT vs. MAF Academy (P.) Ltd. reported in 361 ITR 258, she submitted that the Hon'ble Delhi High Court in the said case has held that where assessee, a private limited company, sold its shares to unrelated parties at a huge premium and thereupon within short span of time those shares were purchased back even at a loss, share transactions in question were to be regarded as bogus and, thus, amount received from said transactions was to be added to assesee's taxable income under section 68 of the Act.

Further, placing reliance on the decision of the Hon’ble Delhi High Court in the case of CIT vs. Navodaya Castle Pvt. Ltd. reported in 367 ITR 306, she submitted that the Hon'ble High Court remitted the matter back 14 to 7532/Del/2017 to the Tribunal for fresh adjudication since the assessee was unable to produce the directors and the principal officers of the six shareholder companies and also that as per the information and details collected by the Assessing Officer from the concerned bank, the Assessing Officer had genuine concerns about identity and creditworthiness of shareholders as well as genuineness of the transactions. She submitted that the SLP filed by the assessee was dismissed by the Hon’ble Supreme Court.

Referring to the decision of the Hon’ble Bombay High Court in the case of Konark Structural Engineering (P.) Ltd. vs. DCIT reported in 90 taxmann.com 56, she submitted that the Hon'ble High Court in the said decision has held that where assessee-company received certain amount as share capital from various shareholders, in view of fact that summons served to shareholders under section 131 were unserved with remark that addressees were not available and moreover those shareholders were first time assessees and were not earning enough income to make deposits in question, impugned addition made by AO under sec. 68, has to be confirmed.

On the basis of the decision in the case of Prem Castings (P.) Ltd. vs. CIT reported in 88 taxmann.com 189, she submitted that the Hon'ble High Court has held that where assessee company had received share capital from various contributors and admitted that alleged investors were close friends and business associates of its directors, burden was upon assessee to disclose true and correct details of said investors and since identity of 15 to 7532/Del/2017 alleged investors was never established additions made under section 68 was justified 26. Ld. DR relied on the decision in the case of CIT vs. Nipun Builders & Developers (P.) Ltd. reported in 350 ITR 407, for the principle that where assessee failed to prove identity and capacity of subscriber companies to pay share application money, amount so received was liable to be taxed under section 68.

Referring to the decision in the case of CIT vs. Nova Promoters & Finlease (P) Ltd. reported in 342 ITR 169, she submitted that the Hon'ble Delhi High Court has held that amount received by assessee from accommodation entry providers in garb of share application money, was to be added to its taxable income under section 68.

In CIT vs. Ultra Modern Exports (P.) Ltd. reported in 40 taxmann.com 458, Ld. DR submitted that the Hon'ble Delhi High Court has held that where in order to ascertain genuineness of assessee's claim relating to receipt of share application money, Assessing Officer sent notices to share applicants which were returned unserved, however, assessee still managed to secure documents such as their income tax returns as well as bank account particulars, in such circumstances, Assessing Officer was justified in drawing adverse inference and adding amount in question to assessee's taxable income under section 68.

Referring to the decision in the case of CIT vs. Frostair (P.) Ltd. reported in 26 taxmann.com 11, she submitted that the Hon'ble Delhi 16 to 7532/Del/2017 High Court has held that where details furnished by assessee about share applicants were incorrect, addition under section 68 was proper.

Referring to the decision in the case of CIT vs. N R Portfolio Pvt. Ltd. reported in 29 taxmann.com 291, she submitted that the Hon'ble Delhi High Court has held that if AO doubts the documents produced by assessee, the onus shifts on assessee to further substantiate the facts or produce the share applicant in assessment proceeding.

Referring to the decision in the case of CIT vs. Empire Builtech (P.) Ltd. reported in 366 ITR 110, she submitted that the Hon'ble Delhi High Court has held that u/s 68 it is not sufficient for assessee to merely disclose address and identities of shareholders; it has to show genuineness of such individuals or entities. She also placed reliance on the decisions reported in CIT vs. Focus Exports (P.) Ltd., 51 taxmann.com 46 (Delhi), PCIT vs. Bikram Singh, ITA No.55/2017 (Delhi), and Rick Lunsford Trade & Investment Ltd. vs. CIT, 385 ITR 399 (Cal) for the same principle.

Ld. DR further submitted that in the case of Rick Lunsford Trade & Investment Ltd. vs. CIT [2016-TIOL-207-SC-ITJ (Supreme Court), the Hon'ble Supreme Court has dismissed the SLP upholding the decision of the Hon’ble High Court that it is open to the Revenue Department to make addition on account of alleged share capital u/s 68, where the assessee company has failed to show genuineness of its shareholders. A.O. has categorically after making necessary inquires & after taking into 17 to 7532/Del/2017 consideration of investigation reports & search & seizure materials made the addition.

The sum and stance of the argument of the ld. DR is that, the investee companies are paper-existing only without physical existence, those were never produced for examination by A.O, such entities have no worthy business to advance such investment, such entities have no proper identity of existence without any creditworthiness, such entities only indulged to provide accommodation entries of unaccounted/undisclosed money routed through banking channel creation of PAN & filing of Income Tax returns etc., thus doing only non-genuine transaction/bogus transaction, and basing on these discrepancies, significant deficiencies/discrepancies have been established by said A.O. to prove identity as non-existent/bogus only paper entities/creditworthiness is absent due to negligible/loss Income of such entities/genuineness of transaction is only sham/non-genuine.

Ld. DR justified the impugned order stating that the ld. CIT(A) has correctly in fact & in law has dismissed the appeal of assessee holding that Assessee has failed to prove identity, creditworthiness & genuineness of transaction & burden of proving such ingredients of provision of section 68 of Act was never discharged from Assessee due to utter failure to produce substantive corroborative evidence to prove such. He has categorically held that Assessee has not done a reliable & robust valuation of share premium charges strictly as per Rule 11 UA(l)cb r.w.s. 56(2)(viib)

At this juncture reference to the case law relied upon by the Ld. AR becomes necessary. In CIT vs. Best Infrastructure (India) (P) Ltd. reported in 397 ITR 82 the Hon’ble jurisdictional High Court has held that statements recorded u/s 132(4) of the Act do not by themselves constitute incriminating material, with the following observations:-

For all the aforementioned reasons, the Court is of the view that the ITAT was fully justified in concluding that the assumption of jurisdiction under Section 153A of the Act qua the Assessees herein was not justified in law.”

Further in CIT vs. Harjeev Aggarwal reported in 290 CTR 263 (Del) Hon’ble Court observed that,- “23. It is also necessary to mention that the aforesaid interpretation of Section 132(4) of the Act must be read with the explanation to Section 132(4) of the Act which expressly provides that the scope of examination under Section 132(4) of the Act is not limited only to the books of accounts or other assets or material found during the search. However, in the context of Section 158BB(1) of the Act which expressly restricts the computation of undisclosed income to the evidence found during search, the statement recorded under Section 132(4) of the Act can form a basis for a block assessment only if such statement relates to any incriminating evidence of undisclosed income unearthed during search and cannot be the sole basis for making a block assessment.”

The Co-ordinate Bench of the Tribunal in the case of Brahmaputra Finlease (P) Ltd. vide ITA No.3332/Del/2017 order dated 29.12.2017, following the above decision of the Hon’ble Delhi High Court, has observed as under :- “4.19 We find that in the case of best infrastructure (India) private limited (supra), despite the admission of accommodation entry in statements under section 132(4) of the Act, the court held that the statement do not 22 to 7532/Del/2017 constitute as incriminating material. In the instant case, neither is there any statement of any accommodation entry operator claiming that any entry was not provided nor any director has admitted that assessee obtained accommodation entry. Thus, the case of the assessee is on better footing then the case of Best Infrastructure (I) P. Ltd (supra). In such facts and circumstances, respectfully following the decision of the Hon'ble Delhi High Court in the case of best infrastructure (India) private limited (supra), we do not have any hesitation to hold that the statement under section 132(4) of Sh. Sampat Sharma cannot be treated as incriminating material found during the course of search. In the result, we hold that addition of share capital in the year under consideration has been made without relying on any incriminating material found during the course of search.”

In the light of the above decisions, statements recorded u/s 132(4) of the Act, 1961 cannot constitute as incriminating material.

In this context, it could be seen from the order of the ld. CIT(A) that there was no surrender of income for the impugned assessment year and the surrender was only for the assessment year 2008-09 which too was retracted within two months. He has also observed that the statement was non descriptive and vague and subject to cross checking of fact to be explained after access to books of accounts. We, therefore, find merit in the submissions of the ld. counsel for the assessee that the addition made by the Assessing Officer u/s 68 of the Act is not based on any incriminating material and is based on statements recorded during search u/s 132(4) and post-search enquiries.

As has been stated above, the addition of Rs.39 lacs was not made on the basis of any incriminating material, but is based on statements recorded during the search u/s 132(4) and post-search enquiries. It has been held in various decisions that completed assessments cannot be 23 to 7532/Del/2017 disturbed u/s 153A in absence of any incriminating material. We shall refer to the leading cases on this aspect.

The Hon’ble Delhi High Court in the case of Kabul Chawla reported in 380 ITR 573 has held that the completed assessment can be interfered with by the Assessing Officer while making the assessment u/s 153A only on the basis of some incriminating material found on or during the course of search or requisition of documents or undisclosed income or property discovered in the course of search which were not produced or not already disclosed or not known in the course of original assessment. Following the above decision, the Hon’ble Jurisdictional High Court in the case of CIT vs. Meeta Gutgutia reported in 395 ITR 526 has taken a similar view and has held that once the assessment has attained finality for a particular year i.e. it is not pending then the same cannot be subject to tax in proceedings u/s 153A of the Act. This, of course, would not apply if incriminating materials are gathered in the course of search or during the proceedings u/s 153A which are contrary to and/or nor disclosed during the regular assessment proceedings.

Again in the case of Pr.CIT vs. Lata Jain reported in 384 ITR 543 the Hon’ble Delhi High Court has held that in absence of any incriminating material found as a result of search, assumption of jurisdiction u/s 153A was not in accordance with law. The various other decisions relied on by the ld. counsel for the assessee also supports his case.

In the case of CIT vs. Sinhgad Technical Education Society reported in 397 ITR 344 Hon’ble Supreme Court upheld the decision of Hon’ble 24 to 7532/Del/2017 Bombay High Court wherein the Hon'ble High Court had upheld the decision of the Tribunal holding that the incriminating material which was seized has to pertain to the assessment years in question and it is an undisputed fact that the documents which were seized did not establish any co-relation, document-wise, with these four assessment years.

Since in the instant case addition of Rs.39 lacs was made on the basis of statements recorded u/s 132(4) and post-search enquiry and no incriminating material was found/seized during the course of search, therefore, following the decisions cited (supra), we hold that no addition could have been made u/s 153A since the assessment was not abated in the instant case. In view of the above, we hold that the ld. CIT(A) was not justified in upholding the action of the Assessing Officer in assuming jurisdiction u/s 153A of the Act. Accordingly, the addition made by the Assessing Officer and upheld by the ld. CIT(A) in the 153A assessment proceedings being void ab-initio are deleted.

Inasmuch as the assessee succeeds on the legal ground, we deem it not necessary to delve deeper into the arguments made by the ld. counsel for the assessee on merit since such adjudication would be academic in nature.

The appeal filed by the assessee is accordingly allowed.

When the assessee preferred appeal before the Learned Commissioner of Income Tax (Appeals), by way of impugned order, Ld. CIT(A) vide paragraph No. 5.9 inferred that the material found during the search in respect of equity received by the assessee cannot lead to the conclusion drawn by the AO, no specific corroborative evidence has been brought on record by assessing officer to prove that the equity subscription is an accommodation entry. Ld. CIT(A) further observed that the assessee had also discharged its onus and submitted all the documentary evidence in respect of the investment and the details are submitted in this regard by the assessee were also made part of the order of the Assessing Officer. Ld. CIT(A), however, dealt with this matter under section 56 (2) (viib) of the Act and recorded a finding that the case of the assessee clearly falls in the mischief of this section and hence the premium charged by the assessee has to be subjected to the provisions of section